FEW COMPANIES HAVE
prospered more from the oil boom than
Given Wall Street's enthusiasm for oil services generally, and FMC in particular, it's no surprise the company's shares more than doubled in the past year; they recently hit a high of 83.18. FMC was trading Friday for 75, or about 25 times this year's estimated earnings, and 21 times consensus estimates of $3.59 for 2009.
At these levels, however, the stock is priced for perfection, and perfection probably isn't something you want to bet on in the stock market. FMC's shares are discounting 20%-plus growth well into the future, when 9%-10% growth is more likely based on rig capacity, according to Geoff Kieburtz, who analyzes the oil and gas equipment and services industry for Citigroup Global Markets. "We think the 20% growth embedded in the valuation of FMC is unlikely to be achieved unless there is a dramatic increase in prices, and historically that has not been the case," he says.
Kieburtz is bullish on the long-term prospects for the deep-water drilling industry, which would remain attractive, he says, even if oil prices dropped to $80 a barrel from their recent record levels above $130. The discovery of promising new oil fields off Brazil's southeast coast has stoked enthusiasm lately, even if "all demand may not be satisfied," he cautions.
Also, FMC's lofty valuation overlooks the fact that about 15% of its earnings are derived from two non-core units Food Tech, which makes food-processing systems, and Airport Equipment & Services, which makes gate- and ground-support equipment for airports. Both are scheduled to be spun off sometime this summer.
"It's the most fully valued of any stock I cover," says James Crandell, an oil-services analyst at Lehman Brothers. "I wouldn't recommend the stock here."
Despite the excellent long-term outlook for its business, FMC trades for more than twice the premium to the oil-services group that Schlumberger, the top company in the business, commands, Crandell notes. Nor does FMC's valuation take into account any of the risks associated with subsea drilling, such as project delays and material costs. Major opportunities for the industry and the company are off the coast of Angola in West Africa. Other hot spots include the fields off Brazil, in the Gulf of Mexico and, increasingly, Asia.
Stifel Nicolaus analyst Thaddeus Vayda downgraded FMC from a Buy rating to a Hold late last week, citing the stock's excessive valuation. The shares would be compelling around $66, he said.
The Bottom Line
At about 75, FMC's stock is discounting 20%-plus growth optimistic even in today's hot oil market. A more compelling entry point is 66.
OTHER REASONS, TOO, SUGGEST FMC could be braced for a comeuppance. Perhaps because the company was stretched thin as a result of the heady growth of the past several years, its ranking fell precipitously in the most recent customer-satisfaction survey compiled by EnergyPoint Research, an independent outfit in Houston that measures and monitors customer relationships in the oil and gas industry. FMC didn't return calls seeking comment.
In a field where customer service is essential, FMC finished in 25th place out of 32 companies in the 2007 rankings, down sharply from its ninth out of 30 in 2005. The extent of its decline was unmatched by other companies that suffered rating slips. Gauging customer opinions on such matters as performance and reliability, engineering and design, availability and delivery, and quality of personnel, the EnergyPoint poll considered opinions gleaned from 2,319 evaluations from 636 respondents at 176 energy companies, including exploration and production companies, drilling contractors and upstream oil and gas consultants worldwide.
The survey results follow on the heels of embarrassing setbacks at a seemingly star-crossed project in the Gulf of Mexico, BP's (PB) Thunder Horse platform, partly resulting from the failure of subsea equipment FMC designed to BP's specifications. A BP spokesman declined to comment on the company's current relationship with FMC, but said Thunder Horse is expected to be on line by the end of this year.
While it doesn't get much better than FMC from a business perspective, at current levels shareholders shouldn't expect a gusher.